Is 2011 the breakout year for mobile payments?

By Katie EvansChief Technology Editor

Paying with a phone will gain significant traction, Forrester Research predicts.

2011 is finally the year when Near Field Communication, or NFC, technology will reach the hands of millions and other types of mobile payments will gain traction, a Forrester Research Inc. report predicts.

The report, “Mobile Payments Enter a Disruptive Phase,” says while mass market adoption of mobile payments is years away, new mobile entrants—from wireless carriers to alternative payment providers—have the potential to make a mark on payments and possibly impact existing payment systems.

One type of mobile payment involves NFC. NFC is a wireless technology that enables devices to exchange information—including encrypted payment card data—over a short distance. For example, a consumer could pay for goods in a store by waving a smartphone with an NFC chip near an NFC-enabled terminal, or she could tap an NFC-enabled card on a special terminal to pay for a subway ride. NFC uses a merchant’s point of sale system to initiate and authorize transactions. It would require POS upgrades as well as handset makers putting NFC chips in mobile phones.

Mobile payments come in several flavors, Forrester says. They include payments conducted via mobile sites and apps, person-to-person payments via a mobile device, micropayments such as for ringtones or wallpapers, and what Forrester calls unattended point-of-sale such as paying a parking meter with an NFC-equipped phone by tapping it against a specially equipped meter. They also include retail point of sale—mobile purchases made at checkout counters attended by a sales associate.

So why does Forrester predict mobile payments will grow substantially in the coming year? In part because many players see the potential for profit in letting consumers pay with their phones, the firm says.

Card networks like MasterCard already have commercial mobile products, such as mobile PayPass and MoneySend, writes report author Thomas Husson. Visa has a team of more than 60 working on mobile, he adds.

Husson says card networks want to make sure they can take a cut of the small payments that used to be made with cash, such as parking fees and transit fares that have been going electronic. Banks and other credit card issuers that charge merchants interchange fees when cards are used for payments want to protect that revenue stream should mobile payments catch on. And payment terminal makers like VeriFone see potential revenue in terminal upgrades.

Handset makers also are eyeing mobile payments, adding NFC chips to devices. And wireless carriers are realizing they have a hand in the game as they own the secure networks that can enable mobile payments. Husson notes, however, that the carriers are not yet ready to take on the risk of high dollar transactions, the risk-management role is banks’ specialty. Instead, they see payments for now as “an opportunity to create value-added services, increase data revenues, and impose hosting and management fees on third parties that need access to the security module in their subscribers’ phones.”

EBay Inc.’s PayPaland Google’s Inc.’s Google Checkout electronic payment services also have been expanding into mobile. PayPal’s mobile payment volume rose 300% Nov. 15 to Dec. 15 last year compared with the same period in 2009, eBay says.

And some very big mobile and payment players are teaming up for mobile payments, realizing each offers an important piece of the payments puzzle. In the U.S., AT&T, T-Mobile and Verizon Wireless have partnered with credit card company Discover Financial Services to form Isis, an NFC-based payment system that hopes to offer contactless payments for the wireless carriers’ subscribers at merchant locations starting next year.

The significant increase in smartphone sales also is driving mobile payments, Forrester says. Smartphones offer a more convenient user experience than conventional mobile phones and are often bundled with wireless data packages that connect them to the mobile web and thus various mobile payment options. And a small but growing number of smartphones now include NFC chips.